Why the Next Downturn “Will Not Look Like 2008”

Nine years of scorched-earth monetary policies come home to roost.

There are always cycles. The current cycle started at the bottom of the Great Recession and will last “until central banks put on the brakes,” said Ray Dalio, founder of Bridgewater Associates, in an interview with Bloomberg. “We’re in a perfect situation, inflation is not a problem, growth is good, but we have to keep in mind the part of the cycle we’re in.”

We’re “in the late stage of the cycle, a period that might last two years,” he said without specifying how far we’re already into that late stage. We do know that the Fed is gingerly taking the foot off the gas though it hasn’t yet slammed on the brakes.

“When the operating rate gets high enough, when central banks think they should put on the brakes,” he said, “that’s part of the cycle.”

“From 2008 until the central banks put on the brake we have one kind of environment. So now we are closer to its capacity constraints… and we’re still going to have a lot of stimulation… in particular short-term stimulation,” and there is “a lot of cash on the sidelines” by investors, banks, consumers, and companies. “And they can feel that they’re being left out. It feels stupid to own cash in this kind of environment.”

He thinks this environment “is going to be great for earnings and great for stimulation of growth.” But “we have to look beyond that: What is monetary policy going to be in that?”

This short-term stimulus is producing a “spurt,” and this “will be a 12-to-18-month spurt,” and while that spurt is taking place, and while people feel stupid about holding cash, the central banks “will have to tighten monetary policy.”

“There is a lot more interest-rate sensitivity in the economy,” he said. “Assets themselves are more sensitive. Like a 1% rise in bond yields will produce the largest bear market in bonds that we have seen since the 1980 to 1981 period.”

Given that stimulus-driven spurt and the capacity constraints this spurt is running into, the Fed “will tighten at a rate that is probably faster than they’re signaling” because “they’re going to be concerned.”

“You also have a supply and demand situation with bonds,” he said. “With larger deficits, the government has to sell more bonds.” And this is happening just as the Fed and other central banks are letting the securities on their balance sheets roll off, he said.

At the same time, the deficit in the US has been climbing and will likely surge under the new tax cuts, and debt issuance to pay for it is expected to soar.

In November, the US Treasury said that it would increase auctions of Treasury securities that have coupons, so longer-date securities. This excludes short-term “bills,” which mature in 52 weeks or less, and are sold at a discount from face value in lieu of a coupon. An increase in “coupon auctions” would be the first since November 2009.

On January 31, the Treasury Department will announce some details on how it will finance the expected surge in deficit spending over the next three months. According to Bloomberg, “Dealers forecast an onslaught of debt supply that will lead issuance to at least double this year to more than $1 trillion, the most since 2010.” For example, JPMorgan Chase strategists lifted their projection for net new Treasury issuance this year by about $100 billion, to $1.42 trillion – compared to net issuance in 2017 of about $550 billion.

With supply of this new debt surging, and with demand from central banks disappearing and even reversing (QE Unwind), more investors will have to be lured from the woodwork to buy this debt, which may require a more appealing yield. There will always be demand for US Treasuries – but the yield may have to be higher, and therefore prices lower.

Hence the massive bear market in bonds, according to Dalio.

But Dalio said that the next economic downturn is “not going to look like 2008,” which was “a classic debt crisis.” The next economic downturn is going to be different, after nine years of scorched-earth monetary policies.

“The biggest issue is that we talk about the economy as if it were one thing, but there are two economies. In order to look at it, we have to realize: don’t look at the averages because if you go below the averages, you see two economies. So I carved it into the top 40% and the bottom 60%.”

“If you look at that bottom 60% of the economy: there is no employment growth, there is not the wealth effect, there are rising death rates… There is a problem about that population in terms of its income and its condition.”

“We have social problems now, we have political tensions now. The reason we have populism now is because of that phenomenon. This is when things are good. So when the economy goes down, I think this issue is going to be a problem—“ At that point the video is cut off, and it’s left up to our own imagination to flesh out the details.

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138 comments for “Why the Next Downturn “Will Not Look Like 2008””

cdr

Jan 24, 2018 at 4:12 pm

The next downturn will be a battle of the credibility of the money printers vs the real economy that everyone understands.

I think that real money will prevail over financial engineering, although the concept of financial engineering and money printing will evolve and encompass a mortgage on the real wealth of nations beyond the concept of fiat. Gold will not emerge a winner. Fiat will win, but people will see it as a mortgage on the actual wealth of the nation printinvg it. The concept of debt vs fiat will emerge and debt be more honestly evaluated.

Frederick

Jan 24, 2018 at 4:40 pm

Gold sure is “winning”today So is Silver Fiat is finished

kevin

Jan 25, 2018 at 11:39 am

Gold is not ‘winning’ when measured against equities. It is not even winning when measured against real estate.
Portfolio performance is always about relative measures.

If everyone else is making bucket loads of money at 15% per year, while your gold holdings are making ‘only’ 5% per year. You still LOSE, even though you are making absolute gains from your original amount held.

If everyone else’s wealth is rising at 10% per year MORE than you, inflation will rise at 10% more than what you can afford since everyone else will bid up the prices of everything from houses to automobiles to your regular cornflakes at a rate of 10% more than you can afford. So you lose to consumer-led inflationary forces. It is that simple.

That is why everyone is buying into the stock market, mostly via ETFs, because they fear losing out on a relative basis. This is one of the factors driving market cycles.

The stock market animal is ALWAYS counter-intuitive and it will ALWAYS move against the general market sentiments. When people are still cautious and investing luminaries such as Ray Dalio or some others are still giving out WARNINGS, then I know the end is not here yet.

Fortunately or unfortunately, this gravy train will keep on rising and it will keep on frustrating all those people who were late to this game and did not manage to catch the train. It will rise and rise and rise and rise…. and then rise some more, until the last bear cannot bear the emotional pain of losing out to others any more and rushes in. THAT will be the last burst of euphoria and THEN, it will fall just when those of you the last bears holding out finally gives in. This is not my prediction because I can’t predict when the last bear gives up.

Thus, I will only SELL when all the Bears finally shut-up and NO ONE seems to be giving out anymore warnings of catastrophe in forums, in BusinessWeek front pages or even amongst your friends in the local tea houses. I am not saying this in any smart alecky way. I’m saying this is simply the way this animal works. Its behavior is the sum total of all our collective behaviors.

Kent

Jan 25, 2018 at 1:49 pm

Great post Kevin. I am that last bear. I’m in all cash since 2004. But this market has got me wanting to jump in. I just can’t bring myself to do it. Maybe this time next year when the market has gone parabolic.

I promise I’ll let everyone know when I can’t hold out any longer. I’ll give everyone 24 hours to get out before I crash this thing.

FH

Jan 25, 2018 at 10:31 pm

Stocks are beating gold and gold is beating stocks. Depends on your time horizon. I think longer term is the way to view the debate, as what we are going through is a multi-generational paradigm shift

Laurence Hunt

Jan 26, 2018 at 12:32 am

I’m not saying you’re wrong about how bubbles play out, Kevin, but I’m sure I’m not the only one who will never stop being bearish on this market. I thought it had gone too far in 2003 — and I still do. Obviously behaviour can remain divorced from fundamentals for a very lengthy period. But I have no desire to participate, nor do I feel I’m missing out.

Oh dear Kevin. Stocks are indeed ‘winning’, for now. But you make the perennial retail investor mistake of talking about gains as if it were money in the bank. It never is. Nope, those making gains stay invested, believing it’ll carry on going forever and ride the market all the way down again – and sell at the bottom. Your views on gold are erroneous. This time is not different, but you believe it is. Good luck!

LessonIsNeverTry

Jan 28, 2018 at 2:07 pm

There is never a clear cut “last bear” in these cycles. People will always try to predict loudly the big downturn because the social penalty for being early/wrong is small and the potential reward for being a guru is so large. It is possible we are seeing the “last bear” concept in real time right now, with monthly RSI at record levels (not that I think RSI is all that great a technical indicator).

Ppp

Jan 24, 2018 at 5:08 pm

You are taking Dalio at his word. Mistake. He is really saying, please sell me your Treasuries.

He knows that financial conditions are loose and getting loser (as Goldman noted TODAY). Everything done to drive rates higher, drives them lower. Nothing can stop the drive to negative interest rates, which is why he wants your Treasuries NOW. He has done this before.

He appears not to know that when liquidity reaches 100%, and thus 0%, the U.S. will have to restructure all debt or be overthrown.

But that is in the nasty future. In the meantime, don’t sell him your Treasuries.

Oh, and if you are worried about looking stupid for holding cash, then buy Treasuries.

The Great Deflation will stop the supply chain.

cdr

Jan 25, 2018 at 10:27 am

“You are taking Dalio at his word.”

No I’m not. I never read what any of those people say. A complete waste of time. To me he’s just ‘Some Guy Who Said Something”.

Looks, he doesn’t know anything special. If he did, he would be a billionaire who DID NOT need OPM for anything. Same with the others. He’s just a great salesman. Nothing more. All are just talking heads who could sell bagged s*it to a fly. When one gets something right by accident, people rave about the fantastic call. That’s a testament to the stupidity of the average person.

Laurence Hunt

Jan 26, 2018 at 12:35 am

Just to clarify, Dalio is one of the “good guys,” who cares about fundamentals. I don’t always agree with him, but I would never ignore him.

cdr

Jan 26, 2018 at 9:14 am

Laurence Hunt ,

That’s part of the scam. Pick your favorite commentator, the one who appeals to you, and give him/her special abilities … all in your imagination. He’s a salesman with opinions. He’s a masterful salesman. His economic skills involve hiring people who know how to follow the herd using OPM, thus, no personal risk to him. Or the masterful skills of selling advice which follows the herd without ever being challenged when the advice is wrong. As always, the few times it’s right is a ‘great call’. The majority of times it’s nothing but boilerplate herd following and is still considered a “great call’ if it’s right and ignored if it’s wrong.

Like nearly everyone, you are conflating a salesman you personally like with being a psychic financial wizard.

If you sit through econ 101 and actually use what you learn … completely ignoring the goofy graphs that manufacturer triangles out of marginal uselessness, you will know as much or more than your favorite guru. However, you will never match their salesmanship.

Krugman was quoted yesterday about how to capitalize banks with printed money and, supposedly how it’s a great idea since no inflation will result if everyone does it and interest rates remain low. I’m glad people realize he’s nothing but an economically illiterate clown now. Too bad they didn’t before. His ideas caused a lot of damage and are still creating a lot of damage. Again, a good econ 101 course would put you miles ahead of him, too.

The Fed is fighting itself, moving rates does nothing to alter liquidity, other than cut off activity in the real economy, in which case negative interest rates is the solution and lower rates bring back the high yield bond market which fuels speculative energy exploration and a collapse in prices. The Fed is doing two things, pushing on the dollar, to keep that from collapsing too quickly which would bring an end to the rate hike fantasy, They could end the hot money flow (they don’t want to) by carpet bombing Switzerland.

Justme

Jan 25, 2018 at 12:57 pm

>>He appears not to know that when liquidity reaches 100%, and thus 0%,

The above sentence is just the tip of the iceberg of meaningless sentences that constitutes your last post. I dare you to defend your use of the word “liquidity”, and what 0% means and what 100% means, and why they are equal. Not because you can, but because readers should be informed that the sentence is devoid of any reasonable interpretation. It is just a mumbo-jumbo of words that sounds vaguely important to someone uninformed.

Furthermore: Readers are advised to look up the definitions of liquidity on Wikipedia (both accounting liquidity and market liquidity). Those are the REAL meanings of the word liquidity. Not some imagined meaning by some guy on the internet.

thats good, i don’t think we really understand debt/credit very well. and i visualize an environment which i call the death of gold, where it does not function as a traditional hedge. (bitcoin is electronic barter if you follow me). money is debt (that dollar in your pocket is a liability) and when fiat in debt units and not currency the problem resolves itself. the credit ratings agencies are the new money printers.

R Davis

Jan 24, 2018 at 9:21 pm

“the credit ratings agencies are the new money printers”

To me, the credit rating agencies are at the beck & call of the banking system, they talk it up or down according to the cries for help from the banks.
example:
Muttley! Do something! calls Dastardly.
Muttley has the best dog laugh.

Debt and credit are easy to understand. Financial engineers and their associated sales associates are expert in making it looks geewhiz confusing so that they can perpetrate the biggest theft in history … taking the wealth of the middle class and siphoning it to the upper 1%. Laws that support open boarders and flexible labor sources are the other elements in this plan.

Somehow, printing money to buy debt and low rates that eviscerate savings or negative rates that are a tax on savings, all so the rich can borrow for little to no cost and asset prices rise so profits can be claimed by paper flipping had been made an everyday normality.

Debt and credit are VERY EASY to understand. Anyone in an important position who claims otherwise is just following orders and those orders are not in support of you or me.

FH

Jan 25, 2018 at 10:27 pm

In all truth, this comment is incoherent.

cdr

Jan 26, 2018 at 9:28 am

Back at you, Mr Krugman.

James Levy

Jan 24, 2018 at 4:19 pm

The problem is the same as under Bush II and Obama: throwing money at people with a low marginal propensity to spend only jacks up assets, it does little to nothing to stimulate the economy which most people live in. But the Powers that Be will do anything, try any cockamamie scheme, rather than just raising wages, building homes for the homeless, or giving people jobs rebuilding our infrastructure and environment. How about giving college kids a bunk and three squares a day to plant trees like they did with the CCC, and after four summers their debts are wiped clean. Just one of a hundred ways we could help ordinary people.

Kent

Jan 24, 2018 at 5:13 pm

The core of American ideology is that all wealth and gains must appear to come from the private sector. That’s why Obama didn’t go for single-payer. Your health must be provided by private doctors in private hospitals with payment through private insurance companies.

Gibbon1

Jan 25, 2018 at 2:03 am

Reminds me of when I was a kid getting crap from other kids because my dad worked for the fed’s. Obviously my dad was sponging off hard working men like their dads that worked at places like FMC and Lockheed.

Petunia

Jan 25, 2018 at 10:47 am

Kent,

You are definitely right about the myth of privately created wealth in America. The other myth they love is the inventor in the garage myth. This one has been overused in Silicon Valley. It should be renamed the steal and repurpose your way to success ideology.

Gibbon1

Jan 26, 2018 at 1:42 am

> It should be renamed the steal and repurpose your way to success ideology.

There is a place for guys in a garage that have an angle that allows them to fill an unmet or ignored need. But lets not kid ourselves, the entire Silicon Valley was created by WWII and the Cold War spending on techno death machines. Eventually by the 1980’s enough cold war era technology was re-purposed for commercial products[1] that it was sustainable without too much government supplied infusions of cash[2]. But that took 50 years.

[1a] All the technology behind WiFi was originally classified RF communications technology developed in the 1950’s 1970’s.

[1b] If you think google earth is a commercial product I have news for you.

[2] There is still a lot of dark money feeding outfits in the valley.

Tiki

Jan 24, 2018 at 5:18 pm

Thankyou

Paulo

Jan 24, 2018 at 6:05 pm

Good comment James. The problem with your heartfelt concern is visible in your last sentence. You care about ordinary people. The people in control only care about themselves and their friends/cronies; most certainly not about ordinary people.

You most likely have compassion and a conscience, too.

In contrast to the article’s statement about feeling stupid having cash (as opposed to paper wealth in the market), I disagree. I feel very grateful to have some savings in the bank and grateful for the life my family is able to lead. I just finished a book about Hedge Funds and how corrupt most of them are with insider trading practices and dark pool shenanigans. Wow, these people who run them are sick in the head, spirit, and soul. The system is sick by failing to prosecute and jail the worst offenders. Just my opinion for what it is worth.

I’m buying a new woodstove next week. Big investment :-)

Rates

Jan 24, 2018 at 7:32 pm

The problem worse. Most ordinary people don’t care about other ordinary people either. People are just indifferent in general.

To care is asking for hurt, and the entire psychology of the entire Western world over the last 30 40 years is to avoid hurt and look for pleasure.

And no lesson is going to be learned after this either. After all the lessons of the Great Depression was first forgotten and then later abused by Ben Bernanke and his ilk.

Michael Fiorillo

Jan 24, 2018 at 8:50 pm

“To care is asking for hurt…”

Yes, and it makes you a chump in the eyes of many “winners.”

R Davis

Jan 24, 2018 at 9:35 pm

“to care is asking for hurt”

To care because it make you feel good, when you expect reward from the receiver it gets tricky, & sure, sometime you get kicked in the backside & when is anyone grateful, besides which, you butt in with your care because you can’t mind your own business, who asked you & like you have all the correct answers, & it goes on.
I care & it’s about me & not the recipient, so they are not grateful, wow, how deep that can get .
Hurt is a place you should not aim for.
Do it for you man & smile away.

“lessons learned”
Everyone wants to put their own individual footprint on the scene, is all.

Ian

Jan 25, 2018 at 3:30 am

You are right that most ordinary people don’t care. I also believe that just do not understand what’s happening around them and believe the propaganda put out, which let’s face it, is of exquisite quality. Young people from ordinary backgrounds these days are aligned to the supposed greater world views of the likes of Bezos, Branson, bank CEOs, hedge fund managers and our neoliberal politicians – globalization, the EU, mass immigration, no borders and other destructive BS. Their support for the same things as the number 1’s is against the natural order. Meanwhile they are aghast at their job prospects, wages and conditions working as an Amazon picker being monitored how long they spend in the toilet and being replaced by cheap immigrants. They just do not see the relationship between the two and that they are essentially turkeys voting for Christmas.

Riq

Jan 24, 2018 at 8:46 pm

Pablo,
Yes, buying a good wood stove may be the best move to make, not as an ‘investment’ but as a real life choice that serve you and family without stealing. Good move!

kam

Jan 25, 2018 at 7:21 pm

James
Excellent idea- there are plenty of ways to improve the country and economy, short-term and long-term that could be set-off against student debt.
Your example of planting trees- a growing forest is a growing asset which would pay for the extinguishment of student debt.
K

Hirsute

Jan 24, 2018 at 4:26 pm

All I heard Ray Dalio saying was that he is part of, and a great beneficiary of, the private central banking cartel. His comments about the unwashed masses sounded to me like whistling past the graveyard.

No he opined all the usual bromides, money on the sidelines, goldilocks economy, problem down the road, the can has been kicked and you can’t even see it, it went so far, gosh. that’s what you do in Davos. His wall of worry is so pathetic I only worry that if everyone takes his attitude the market will die of ennui.

Ed

Jan 24, 2018 at 8:18 pm

I thought his main message was that the people who feel left behind now, in relatively good times, will feel much worse and be angrier when things get bad.

I mean, half his talk is about investing and business, true, but the other half is about how the U.S. economy is not working for everyone like it once did.

That’s a problem & a problem that is being exacerbated by current economic policy, from Congress to the White House to the Fed.

Rates

Jan 24, 2018 at 6:00 pm

Nope, he said to jump in with both feet. Quoting from the above: “It feels stupid to own cash in this kind of environment.”

Hirsute

Jan 24, 2018 at 7:52 pm

Just talking his book. And using language that is easy to parse afterwards (“I said it ‘feels stupid’ but in fact it was the winning strategy and I tried to warn everyone!”) The global elite are worried about the exit strategy. Every one of these elites is looking to throw someone else under the bus. Ray doesn’t have to be faster than the bear, just faster than the other guy…

Read the context in which he said it. That’s why I put the context there. It was quoted out of context in the media because they didn’t listen to the whole interview. He said this because “feeling stupid for being in cash” – it’s the FOMO – is one of the signs for him that the cycle is nearing its end.

You can listen to the interview. It’s linked in the article.

BTilles

Jan 25, 2018 at 7:51 am

A mash-up of Minsky and Case-Deaton is seldom pretty.

Maximus Minimus

Jan 24, 2018 at 6:01 pm

If you listen to all the official speeches in Davos, you will know they are all concerned about the small peeple. That’s the ceremonial duty for many years, now.

Gershon

Jan 25, 2018 at 1:35 am

The yearly confab of gold collar criminals at Davos has one purpose: to plot how to most efficiently concentrate all wealth and power into the greedy hands of the globalist oligarchs.

Cynic

Jan 25, 2018 at 7:48 am

Yes, the are so concerned about ‘the small, ignorant, uncouth white people who are turning Populist ‘- ie thinking about standing up for themselves.

Probably it’s the extra security costs that this popular reaction would entail which preoccupy them?

One thinks of Hollande in France who laughed at the poor people who elected him (the ‘Socialist’) and couldn’t afford dental care -‘les sans-dents.’

timbers

Jan 24, 2018 at 4:27 pm

Me thinks there are small hints of “this time is different” in saying the next downturn will be different.

With some asset prices have risen to such high levels not justified by rational returns unless “scorched earth monetary policy” remains in place, it hard to be confident we will not see some spectacular declines, and hard to see how that will not affect “liquidity” w/o the usual massive intervention by the Fed and govt to benefit the ultra-rich as usual.

Bobby

Jan 24, 2018 at 4:31 pm

Inflation is not a problem until it is a problem.
It will be interesting if this goldilocks economy gets a visit by the three bears soon like the story.. , maybe inflation due: higher oil (papa bear) , further drop in the US dollar (mama bear) or trade tariffs (baby bear)

interesting

Jan 24, 2018 at 7:12 pm

I wish I lived on that inflation is not a problem planet. Here on my planet is a huge problem……health care = up, food = up, shelter = up…..

A little guilty pleasure is the Carl’s JR #6….the “$6 dollar” hamburger, medium combo is almost $12……Inflation is not a problem…..

Gibbon1

Jan 25, 2018 at 2:15 am

The way I think about standard measures of inflation is only changes in inflation rates are meaningful. Yet people treat the number as if it means anything, within reason it doesn’t.

What is important is long term trends in prices vs family income. That does mean something. Or wage share of GDP, that means something.

Difference between 1.5% and 2.5% inflation, means nothing.

MC01

Jan 25, 2018 at 7:10 am

Inflation started to be a problem last year already. Leaving consumer prices alone, production prices are shooting up horrendously all across the board.
Yesterday I got a reply on a quote for some castings. Up 9.12% from 2017. The molds haven’t changed in a year and the alloy is actually down about 10% from last year (I price it in euro as it’s my main market) and I honestly doubt the firm gave their people a massive raise for 2018: if they are lucky they got the offical CPI.
I also looked up prices from several Chinese vendors this week. They all give pricing in US dollars but even with the greenback in freefall against the euro the average increase over 2017 is a whooping 15.35%.
And the less I speak about shipping, the better. The only bit of good news is the last order from China finally arrived in time and well packaged… usually you cannot have both.

This is where all worldwide growth over the last year or so has come: inflation is heating up everywhere in our production system. As it has happened several times since 2009 some of the enormous mass of liquidity sloshing throughout financial markets has spilled into the real world causing inflation to flare up.
So far these flare-ups have mostly been contained: prices raise faster than anybody would like, retailers are forced to either jack up prices more than the average consumer can stomach or slash quality and profits across the board to keep the price low, a glut in supply builds up (old vendors see their stocks pile up and new ones crank up the assembly lines), prices start to come down as retailers need to move stock and the situation finally somewhat stabilizes, albeit baseline prices have on the average increased across the board.

Vendors and consumers hate these flare-ups because they struggle to cope with them (the former are always living on rice paper thin margins and the latter rarely see their wages keep up with real inflation) but public companies and governments love them because they allow to goose up revenues and GDP figures without having to do anything.

Gershon

Jan 24, 2018 at 4:42 pm

Precious metals are surging as the Fed’s deranged money-printing finally starts to catch up to the dollar.

Silver is down about 50% in the last 5 years. It’s up about 1.9% this year.

Only another 99% or so to break even…

Patrick

Jan 24, 2018 at 4:49 pm

Yeah, the next one will see a correction or two and CB’s will start firing the money bazookas far sooner than later. From there on out it’s Venezuela style stimulus.

FYI Venezuelan IBVC doubled ‘again’ in only the last week & half. Sure, it’s only in Bolivar terms but someone else will be saying the same when it’s the S&P doubling in ‘only Dollar terms.

Between rescuing ‘Market’s vs the Currency, CB’s Always choose the former. It’s far easier to lie about inflation than dispute what the S&P says in black & white.

TJ Martin

Jan 24, 2018 at 4:53 pm

My guess as previously stated is ;

This economic Potemkin Village that both we ( consumers and the general populace ) and the governments / banks etc have created’s entire facade will be brought down in one feel swoop by a multi headed Hydra of a Black Swan that nobody is anticipating and no one will be able to predict until it finally comes home to roost …. no one that is unless someone finally starts looking beyond the obvious .

Why ? Because brothers and sisters .. this’n ain’t a gonna be like nuthin we’s ever seen before … to a scale previously unimaginable .

Sermon over … a hearty amen … Donuts & Coffee in the narthex

FYI; Thus also beith the opinion of mine CH banker cousins .

Petunia

Jan 25, 2018 at 11:05 am

If the base walks away from the president over an illegal immigrant amnesty, that will be your black swan. I can already anticipate the possibility, that was the line in the sand issue. If he hands over the keys to the gate to foreigners, it’s over, politically and economically.

mvojy

Jan 24, 2018 at 5:01 pm

Like mushrooms with mushrooms growing on them too many people and companies are carrying debt on top of debt on top of debt. Once interest rates rise, the minimum payments will rise and begin a wave of loan defaults.

Do you like apples?

marco

Jan 24, 2018 at 5:03 pm

I get worried when someone supposedly smart can’t even spell a simple word correctly ……,.,

I was in California for a friend’s wedding a half dozen years ago and Garmin kept saying we were on “Pacific Palisades Doctor”.

For sure, could have been the transcription. Hard for the automatic tool to get the context right. And a little bit scary if it does get it right all the time and you use your imagination. AI is coming!

(We were dying each time and Garmin said it A LOT because we had to get around construction.)

break
1. to smash, split, or divide into parts violently; reduce to pieces or fragments:
2.to infringe, ignore, or act contrary to (a law, rule, promise, etc.):
3.to dissolve or annul (often followed by off):
to break off friendly relations with another country.

Well, that was my typo because I transcribed the interview from the video. I spelled it correctly three times and screwed it once. A 25% error rate … hmmm

hidflect

Jan 25, 2018 at 6:34 am

We expect more from the Swiss.

Petunia

Jan 25, 2018 at 11:44 am

marco,

If you were a truly educated person you would know that spelling was arbitrary in the English language until fairly recently in history.

Bobber

Jan 24, 2018 at 5:12 pm

I think this is Ray Dalio’s way of telling the Fed they are behind on their interest rate increases. Dalio’s goal is to push the Fed to increase rates faster, or the bubble will expand for 18 more months and then explode. If he’s real plan was to buy stocks for the next 18 months, he wouldn’t saying it would explode soon afterwards. That would add too much uncertainty to his plan.

I’m speculating we’ve seen the blow-off top already, coinciding with the Trump election and the tax cuts. My outlook says there will be a 10-20% drop in the short-term. A signal the Fed is will get aggressive on rates will seal that deal.

AncientEvil

Jan 26, 2018 at 5:11 pm

I tend to agree with you. Also he didn’t exactly say: avoid cash by going long. You can also go short. LOL

GSH

Jan 24, 2018 at 5:24 pm

QT will last until the first big bank runs into a problem and then the Fed will oblige and print again. That seems to be what everybody thinks.

swm

Jan 24, 2018 at 5:39 pm

Please do remember that it isn’t going to break … ever.
There is no such thing as ‘cycles’.

JD

Jan 25, 2018 at 9:42 am

Yeah … that word ‘cycles’ really caught my attention. Writing like what is going on is so well understood and therefore “manageable” … I do not believe any of what these scum say … they crossed the debt rubicon a long time ago and have to utter word salads that have some minor threads of logic to maintain the illusion that they know how to solve the problems they’ve created … in the meantime those in the know are doing everything possible to save themselves … like buying fine art at unheard of prices or rare autos … whatever …

DB

Jan 24, 2018 at 5:43 pm

What Happens When The Next Downturn Happens?

“Our Biggest Economic, Social, and Political Issue”

Published October 23, 2017
By Ray Dalio

The Two Economies: The Top 40% and the Bottom 60%

To understand what’s going on in “the economy,” it is a serious mistake to look at average statistics. This is because the wealth and income skews are so great that average statistics no longer reflect the conditions of the average man. For example, as shown in the chart below, the wealth of the top one-tenth of 1% of the population is about equal to that of the bottom 90% of the population, which is the same sort of wealth gap that existed during the 1935-40 period.

To give you a sense of what the picture below the averages looks like, we broke the economy into two economies—that of the top 40% and that of the bottom 60%.* We then observed how conditions of the majority of Americans (the bottom 60%) are different from the conditions of those of the top 40%, as well as different from the picture conveyed by the average statistics. We focused especially on the bottom 60% because that’s where the majority of Americans are and because the picture of this economy is not apparent to most people in the top 40%.

And we all know what happened in 1940. But today’s population seems to be pacifiable with attention to selfies and food choices along with cat videos.

akiddy111

Jan 24, 2018 at 5:48 pm

If you want Dalio’s bearish comments from 2009 when the S&P 500 was in the 700’s, I can post them.

These Davos billionaires have been bashing the FED forever. Icahn, Gross, Dalio, Kyle Bass, all of them.

They are earning billions in fees from fully investing their clients money, while telling everyone how central banks have destroyed everything for us all. Yeah, let’s listen to those guys.

polecat

Jan 25, 2018 at 10:31 am

Test …

polecat

Jan 25, 2018 at 10:41 am

These Davos dandies are akin to those people of Romero lore, holed up the perverbial shopping mall, cringing at the thought of all the lowly zombies sloging forward, with the intent of ripping their rich n tasty guts out !

William Smith

Jan 24, 2018 at 5:57 pm

Why don’t they just call it what it is : “Trickle Up Economics” … and it is all working spiffily just as the banksters intended!

Auld Kodjer

Jan 24, 2018 at 6:08 pm

“If you look at that bottom 60% of the economy: there is no employment growth, there is not the wealth effect, there are rising death rates… There is a problem about that population in terms of its income and its condition.”

That’s a lot of people to be two meals and 24 hours from … [fill in the blank]

alex in san jose AKA digital Detroit

Jan 24, 2018 at 6:43 pm

You quoted that paragraph so I didn’t have to …

Yep here in the bottom 60% it’s that bleak and more. We can’t buy cars, we’re lucky to have bicycles, and it’s not living, it’s survival. And consider that more and more middle-class people are ending up out there on the streets living in their cars or out of backpacks.

You can keep say, a bottom 10% downtrodden class down, but when you start “eating” the middle class, well, middle class people know how to do things. They’ve been in Scouts or the military. They know how to not only throw bricks through windows but how to shut down infrastructure, mess with information systems etc. I guess a classic example could be someone who knows tons about IBM’s systems because they worked for IBM prior to being laid off due to being over 40, can’t get another job, lose the house etc. becomes homeless, do you really want a guy with “mad skillz” pissed off at you?

To go back to those discounted to par bond auctions, certainly that’s one thing we might see, like the banana republic we have become. If they pay you to take their paper what do you suppose its’ really worth? When the bond bear market comes back to earth (it’s sooner than you think) the reality of the federal reserve’s exhausted policies on monetary accommodation will bite, when QE comes back to roost it won’t be welcome. And things move a lot faster than they used to with globally coordinated monetary policy the downturn will lead to the dreaded “L” shaped bottom in the stock markets. Many will try to buy that bottom but few will live to tell about it. This is the depression, people of ALL social classes are losing their jobs, and only the beneficence of those in government (at the cost of bankrupting itself) has made any difference. Listen to that part of the interview.

william

Jan 24, 2018 at 6:15 pm

‘Boomer Spending Cliff’ will give the US economy a GDP quarter like 4Q08, which was a sudden steep drop in purchasing that nearly every ’09 budget and ’09 forecast was deemed worthless, worldwide.

As Boomers age in their 60’s and into 70s, their spending drops each year, yet at a faster and faster rate. The current economy does a wonderful job pulling in future demand to current spending through incentives and low interest rates. Delaying SS income and voluntary retirement are incentivized to be delayed. Yet, at one point, all the ‘pent up’ retirement and ‘spending breaks’ will accumulate to a ‘Boomer spending cliff’. Will the Millenials’ spending pick up the slack? Not enough, and not wildly spiking upwards either to counter the ‘Boomer Spending’ cliff.

Enrique

Jan 24, 2018 at 7:09 pm

Oh great another “expert.”

The next talking head to appear on Bloomberg et al that actually gets one of these predictions right will probably be the first. Possible exception being the perma-Bear types whose modus operandi is more or less: “predict disaster every single time then take credit the once a decade he/she is correct.”

That imbecile may actually make something of a name if the first such prediction is well-timed. See Whitney, Meredith.

I’ve worked in finance my whole life. When people ask me what will happen I say “who the *&^% knows; keep yourself relatively liquid and able to make money off what does.”

Petunia

Jan 24, 2018 at 8:15 pm

With the next big initiative being infrastructure spending, you will see a tsunami of debt coming your way. There is no other way to finance it other than issuing bonds for that purpose. They may be talking up the stock market, but they will be buying those high coupon bonds.

Joe Cali

Jan 24, 2018 at 8:38 pm

“2008 was a classic debt crisis”??? What the hell will you call the next crisis when govt, Corp, margin, consumer debt is at historical levels. This is what befuddles me. We keep talking about global economic growth yet ignore that we borrowed/printed/spent $12 to get $1 in GDP. If we had a liquidity crisis in 08 what will happen when the debt & derivative markets are considerably larger than it was in 08? Short Vol has to unwind? Etc. I think 2008 correction will be a wet dream compared to what’s on the horizon. I’d really appreciate for anyone to correct my logic. I want to be wrong.

JD

Jan 25, 2018 at 9:52 am

Exactly … they use language like ‘classic debt crisis’ like a “oh yeah … we know ALL about these things” when in fact the entire global financial system had been nuked by monetary abuse for decades .. everything since 2008 has been literally and figuratively “ borrowed time” …

50+ billion off main street and on to bank balance sheets to buy anything, even legacy assets off the fed balance sheet?

Wendy

Jan 24, 2018 at 9:07 pm

Nobody knows when this market will roll over, but one thing for sure, it will not correct itself by going sideways. The more it spikes up, the harder the eventual fall.

Max Power

Jan 24, 2018 at 9:55 pm

“Goldilocks” is a facade. At this point in a recovery we should be seeing much higher interest rates, falling govt deficits, and a rising M2 money velocity that’s approaching a peak. Instead, we still have depressed interest rates, surging deficits and the lowest money velocity ever (and still falling). Obviously there’s an incredible amount of rot just under the surface.

JZ

Jan 24, 2018 at 9:57 pm

Davos, the conference for millionaire listening to billionaires about what’s wrong with the 99%. When Dalio talks, all I see is that this guy used to go where the FED showers money for the past 9 years. Now the FED stopped, and he turned his eyes to me and billions of others, the 99%. I used to fear the FED, now I have to compete with Ray and hopefully I can survive without getting raped.

Maximus Minimus

Jan 24, 2018 at 10:16 pm

Dalio probably does’t read the Wolf Street. Otherwise, he would know better than to repeat the legacy media nonsense such as “low inflation”.

kubi

Jan 24, 2018 at 11:21 pm

Just about everything in this article has been refuted by Ken Rogoff (a Harvard economist) in a recent, broad based interview.

According to Ken Rogoff (KR)

– (italics are direct quotes from Kenneth Rogoff in the below German Publication .)

KR – “Central banks aren’t to blame for low interest rates. This is a case of global real factors that affect investment and savings which have led to these very low interest rates.”

2) The QE unwind is meaningless

KR- ” Also, quantitative easing in the United States is smoke and mirrors. It’s almost meaningless. The first round of quantitative easing where the Federal Reserve was buying car loans and all sorts of private debt was significant because that’s a fiscal transfer. But simply buying treasury bonds is smoke and mirrors because it’s just the Treasury owing money to the Fed. So it’s absolutely an illusion and I don’t think it matters when they change it either.

3) We are not late into this economic cycle -ten years is fine

KR- “ “In any given year, there is a probability of around 15% for a recession and there is no reason to suppose that the odds are greater than 15% today. On the contrary: There is a very good chance that growth outperforms most of the time the next few years.”

4) negative interest rates are not hurting anyone

“There isn’t any particular evidence that negative interest rates are leading to permanent damages or that the risk of a crisis are higher”

Not sure how this man could go on record if he wasn’t sure what he was saying wasn’t nonsense.

Hahahahaha… this is hilarious that you quote Rogoff on WS. This is the same guy that wants to abolish cash so that central banks can more completely dominate the people and crush the people on a whim with negative interest rates and the like. He thinks cash is “dangerous” because it gives people some modicum of control. That guy is the enemy of the people.

There are all kinds of nutcase economists being harbored at Harvard, but he is tops.

Nicko2

Jan 25, 2018 at 3:27 am

There are many benefits to a cashless society, controlling corruption is just one of them. However, those with the means will always be able to diversify outside the ‘regulated’ arena.

The cashless society is coming though.

Cynic

Jan 25, 2018 at 7:59 am

You are probably right that is is coming, alas. But not to control corruption, at least at the top.

When corruption is endemic, at every tier, one doesn’t need physical cash in brown envelopes – quite superfluous. It won’t hinder the corruption of the elites one bit.

Another point is that the ‘depressed 60%’ can be kept happy by allowing them the possibility of a margin of corrupt income to make up for being in the depressed 60% – see daily life in Iran for instance.

From that point of view alone they would be unwise to abolish cash, viewed as a social control mechanism.

JungleJim

Jan 25, 2018 at 11:37 am

If you really believe that a cashless economy will be less corrupt, you’ve got a nasty surprise coming. It is quite likely to be the exact reverse. You’ll see a huge gray market in which barter, PM, and foreign currency will be routinely used and of course, not reported.

Kenneth Rogoff is a typical example of the academic whores that infest Ivy League economics departments. If you dangle grant money or the possibility of a cabinet appointment in front of them, they’ll tell you that the moon is made of green cheese.

alex in san jose AKA digital Detroit

Jan 25, 2018 at 5:20 pm

Those of us in the bottom 60% will be using something as cash. In wartime economies, cigarettes were often used as cash. Maybe it will be silver dimes and coins in general.

Robert

Jan 25, 2018 at 10:29 pm

If you call the bank taking a little nip out of every transaction while also taking a nip out of your savings every month with negative real rates on savings a benefit to controlling corruption, one would have to assume you are a banker yourself (or conveniently brainwashed.)

Cynic

Jan 25, 2018 at 7:53 am

Oh but Wolf, don’t you know the people might catch all kinds of yucky diseases off handling that physical cash?

I’ve seen the posters in the street (in the UK at least, hilarious!) warning of this.

He loves us and just wants us to be safe. There is nothing safer than being wrapped up in the cotton wool of banker love. :)

polecat

Jan 25, 2018 at 1:09 pm

Yes ! Rogoff** … a ‘warleggan’ if there ever was one !

** Podark reference

JD

Jan 25, 2018 at 10:22 am

The entire “strategy” of a cashless society immediately sentences the homeless to death … but that dime bag pot or crack dealer will be stopped dead in his tracks … yay! As if these economics/monetary system hacks give a flying fuck about crime …

Petunia

Jan 25, 2018 at 10:32 am

Capital One is closing branches and replacing them with some kind of kiosk that has an ATM and sells coffee. You can’t make this stuff up.

NoEasyDay

Jan 27, 2018 at 5:28 am

How long does it take to get a loan approved for a cup of coffee?

kiers

Jan 29, 2018 at 4:00 pm

LOL. true. have seen it. they “synergize” to share RENT! clever (so they think). Pure Harvard, this stuff! Also, Today’s journal: Universities are tied up with Banks to “nudge” students into that bank with their student loans, and every day spending balances! In return big public schools like Berkeley get ~$1.5 million per year. In return, the student ID is cashless transaction medium tied to that bank balance in sponsor’s bank. They call it “fintech”. Pure Harvard.

Maximus Minimus

Jan 25, 2018 at 12:52 pm

Couldn’t have said it better.

Trinacria

Jan 25, 2018 at 2:44 pm

This is a great reply by Wolf. Tells it like it is. I am really sick and tired of people like Rogoff. Like I said earlier, he fits the econ theory to his idiotic beliefs that support the .001 percent. They guy really needs an enema of quick drying cement between the ears…that will cure him. In fact, guys like him and Krugman and too many others to list, do so much damage. I am afraid of serious civil unrest in our future. The liberal idiot just does not want to give the average person is our society an opportunity to take care of themselves and their families. He wants to discourage savings – the bedrock of any sane society. So, when this idiot reduces people to where they have nothing to lose…beware of the man who has nothing to lose. That will lead to serious unrest I’m afraid.

IdahoPotato

Jan 25, 2018 at 3:20 pm

What’s “liberal” about fiscal fascist Rogoff? Nothing as far as
i can see.

raoul

Jan 25, 2018 at 10:59 pm

I didn’t know that so thanks for debunking kubi’s ‘contribution’ to the discussion. I have read Rogoff’s name before but have never paid attention to his ‘work’ because it’s eCONomics …

BTW, it might be nice to be able to reply to a reply. Kent above has a beauty.

Keep up the good work Mr. Richter.

kiers

Jan 29, 2018 at 4:02 pm

eCONomics….like Rogoff getting caught fudging numbers to match his thesis in his NY Times bestseller “This time is different”? you mean like that?

Matt P

Jan 25, 2018 at 1:54 am

I haven’t read such tripe in a long time. Keep bowing down to your fed overlords. Next you’ll say that they have nothing to do with the top .01% owning nearly all the wealth and that it’s good for everyone anyone.

BTilles

Jan 25, 2018 at 8:02 am

All four of the above are demonstrably false. Let’s take number four because ut’s the most patently absurd. Artificially low interest rates hurt all retirees and pensioners attempting to live off their savings. In a low interest regime they are forced to invade principal far more quickly. This is clearly negative for a growing demographic group.

Gershon

Jan 25, 2018 at 1:38 am

Gold continues its upward march as the awake and aware portion of the populace realizes we’ve got an ignorant buffoon in the Oval Office, 535 corporate whores writing our laws, and a criminal private banking cartel in charge of our money issuance.

What could possibly go wrong?

Harambe

Jan 25, 2018 at 12:23 pm

Gold and silver went up simply because Steve Mnuchin’s speech yesterday promising to devalue the hell out of the dollar. Nothing more. And you forgot to say venal.

william

Jan 25, 2018 at 8:49 am

It will be the boomer-to-millennial economy transition:

Kimberly-Clark (KMB) is a Boomer company/stock not adopting fast enough to the Millennial market upswing and boomer decline. KBM’s 4Q U.S. revenue dropped 3% during our booming economy! KMB announced plans for a 13% drop in their workforce.

KMB is one of hundreds of examples. Boomer spending will go off a cliff. It’s a snowballing effect that won’t be a smooth transition to a Millennial-led economy, but choppy and highly disruptive. Major brands trusted for decades are going to fail consumers and investors.

Nicko2

Jan 25, 2018 at 9:04 am

Great insight. The only question is, which companies will the winners (or survivors) be?

c smith

Jan 25, 2018 at 3:08 pm

I would disagree. The millennials are the largest generation in U.S. history. They’re simply getting started later in the baby-making game. KMB is rationalizing some capacity today, but when the cycle comes (soon!), they will be there to reap the benefit. Combine this with really good growth (6% to 7%/yr) ex U.S., and they’re in good shape.

raxadian

Jan 25, 2018 at 9:20 am

Whell you feel stupid for being on cash just buy gold and maybe silver. Middle and kong term cash loses value after all .

JB

Jan 25, 2018 at 11:55 am

Well Mr. Dalio and kin , since the benefits of this current recovery accrued disproportionately , I suggest you mitigate your worry and maybe guilt in this downturn cycle by applying Macron’s proposals at davos .

In September 2008, Macron went to work as an investment banker at Rothschild & Cie Banque.

Macron, qu’est-ce que ce’est? C’est une hostie de bankster!

Dan Romig

Jan 25, 2018 at 5:46 pm

After reflection, maybe this comment is a bit too harsh??? But, the leader of France is, after all, a banker, and that’s why he got the job.

C Jones

Jan 25, 2018 at 12:55 pm

If this US bull market lasts as long as other – albeit, rare – super long US bull markets then there are another four years of upside before a collapse.
Just sayin’…

btw The Fed aren’t unwinding QE. They are merely not doing any more. There’s a big difference.

Bet

Jan 25, 2018 at 12:57 pm

See NWL today , Newell industries. Cratered. Too much PE hairball?

c smith

Jan 25, 2018 at 2:54 pm

The PE firms are rubbing their hands over the firesale about to happen at NWL.

Alessio

Jan 25, 2018 at 1:37 pm

He s worried. Dalio s worried. He hopes central banks don’t use the breaks. They won’t stop. They won’t raise rates. The market will do it.

c smith

Jan 25, 2018 at 2:53 pm

Dalio contradicts himself. The very same “capacity constraints” that he warns about will presumably be the saving grace for the “bottom 60%” of the economy that he is also so worried about. IOW, a revival in economic growth (and maybe a little more inflation) is exactly the salve the segment of the economy left out over the last 10 years needs. If the investor class has to take a few lumps along the way in order to “save the system” from the populist uprising he is also worried about, so be it. About time.

mean chicken

Jan 25, 2018 at 4:31 pm

It’ll be interesting to see if Germany decides to kick the irredeemables to the curb, as has been the practice in the US.

It seems to me, so far, German media has kept the focus on immigration and avoided the subject of Germany as creditor to the rest of Europe.

Forgot to say, nobody knows what that junk is worth b/c central banks have absorbed all the supply at “whatever it takes” prices.

To me, it means that junk is overpriced.

I’m not sure if Ray Dalio is credible, would rather hear about Dan Loeb?

Kiers

Jan 25, 2018 at 7:54 pm

What is this “the operating rate” Dalio mentions? It evokes being some term related to “velocity”, or “cost of equity”?

KiwiinCanada

Jan 25, 2018 at 10:52 pm

Looking at economic stimulus tradionally we have fiscal, interest rates and QE. The recent addition appears to be asset values. Theoretically a negative adjustment to an asset class that does not cause a decline in bank capital would be tapping on the brakes. This as an alternative to interest rate increases is interesting. What degree of tightening would be achieved by a gradual 25% decline in the S&P 500? Reducing or eliminating share buy backs by some mechanism may achieve this. A reversing of the wealth effect may be more benign, especially in a area where there is minimum leverage. An alternative better than raising rates in this environment?

Gershon

Jan 26, 2018 at 1:13 am

“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls . . . become ‘profiteers’, who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished not less than the proletariat. As the inflation proceeds . . . all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless.”

— John Maynard Keynes, ideological godfather to the Keynesian fraudsters at the Federal Reserve and all other central banks

Kiers

Jan 26, 2018 at 12:41 pm

Just an observation:
Dalio and Mohamed El-Erian are saying the very same things:

El-erian: “bimodal distribution” (an overarching theme since his book “The only game in town”)

Dalio: “There are two economies. … the top 40% and the bottom 60%”

Everybody sees it. There is clear bifurcation. Interestingly, both El-Erian and Dalio are calling the present the beautiful “goldilocks” moment (Dalio) or “Beautiful Normalisation” (El-Erian). they are both in the top 40%. they see it the same.

MB732

Jan 26, 2018 at 12:55 pm

Note to Davos folks imagining people marching holding signs “WE ARE THE 60%”…60/40 against may be a tad optimistic if SHTF.

AncientEvil

Jan 26, 2018 at 5:13 pm

Also, wasn’t he the one opening a massive short position on italian banks recently?

Gandalf

Jan 26, 2018 at 7:23 pm

“The stock market will keep rising until the last bear gives up”.

Wait a minute, everybody is forgetting how external world events and even internal strife can totally knock both the world economy and stock markets out of whack.

Does anybody remember Sept. 11, 2001 and the GWOT? Or the various Arab Oil embargoes and other oil crises of the 1970s? Or the starts of both WWI and WWII? Wars always have complex and unpredictable effects on the U.S. and the global economy, none of them good initially, and there are lots of signs point to potential destabilizing conflicts in the future.

Gershon

Jan 27, 2018 at 1:40 am

Not to worry. The Davos Boys are meeting to plan more benevolence for the 99% when it all comes crashing down.

If the policy since 2008 was to prevent the collapse of the entire global economic system, then the policy could be deemed to have worked. The policy bought time.

But if the policy was to improve the lot of the vast majority of people in the eurozone, Usa, Japan, the policy is a failure.

2008 was down to debt. Since 2008 an additional 72 trillion dollars of debt has been issued. If debt brought about 2008, debt will bring about the next crisis to a degree which will be far more excruciating.